Handling eDiscovery Costs, Part 1

Law firms undertaking eDiscovery activities invariably incur costs. Someone inevitably bears those costs. Today’s post looks at those costs and outlines three models law firms use to address the question: Who should bear the costs of eDiscovery? In part 2, I will examine the pros and cons of each approach, discuss how to decide which model to adopt, and offer pointers for success. 

What eDiscovery Costs Do Law Firms Incur? 

The costs law firms incur when they engage in eDiscovery are like those incurred for many of the litigation and investigative activities they undertake. In large part, these costs fall into two groups: the costs associated with having people do things, and the costs associated with the tools people use to do those things. 

People Costs 

Costs from the first group – the things people do – track the stages of the EDRM diagram. These are the hours put in by attorneys, paralegals, eDiscovery and litigation support professionals, and others to: 

• Identify sources of electronically stored information that might be important to the matter they are working on. 
• Preserve that data, so that it is not intentionally or inadvertently changed or destroyed. 
• Collect some of the preserved data to work with, processing that data so that it is easier to search and work with. 
• Analyze and review data with many objectives in mind: Will this data tell me something significant about the matter that I don’t know? Is this case I can use to advance my case? Is this data I must turn over to an opposing party or an investigating agency? 

• Produce data to others. 
• Present some of the data to an audience, either to elicit further information or as part of any effort to persuade that audience. This could be in a client meeting or at a conference with opposing counsel or a regulator; at a deposition, hearing, arbitration, trial, or appeal. 
• At each stage, make sure that what is done conforms with client information governance policies and practices (at least to the extent that doing so is appropriate). 

Law firms incur these people costs in at least three ways, two direct and one indirect: 

• Direct: They pay their own lawyers and staff. 

• Direct: They pay for people outside the firm, some individuals and some with other organizations, who do or assist with eDiscovery tasks. 
• Indirect: They pay for things needed to keep their firms operating – such as rent, insurance, and utilities – so that their people can get their work done. 

Technology Costs 

Costs from the second group – eDiscovery technology costs – also track the EDRM diagram. They are for technology used for everything from the initial identification of data through presentation of data and eventual disposition or other treatment of data in accordance with client information governance policies and practices. 

There are several ways to look at these technologies and their costs to law firms: 

• Where the technology resides: At one end of the spectrum, some tools used for eDiscovery reside in the cloud, data centers, or something similar. These tend to be eDiscovery platforms such as Reveal offers. At the other end, some tools are installed on individual personal computers or mobile devices. These tend either to be tools designed to perform a narrow eDiscovery purpose or general applications tools such as Excel that are frequently used to achieve eDiscovery goals. 
• The technology’s primary intended purpose: Some tools used for eDiscovery are designed specifically for that purpose (think Reveal’s offerings). Other tools, while not designed with eDiscovery in mind, are widely used in the eDiscovery context (think Excel). 
• Whose budget pays for the technology: In one firm, all technology costs might be paid for by the IT department. In another, different technology costs might be covered by different groups or departments. For example, IT might cover the cost of Excel, a tool used by a wide range of people in a wide array of contexts, while the litigation support department might be responsible for the costs of technology used specifically for eDiscovery. 
• How the technology’s use and cost line up with specific billable matters: With some tools, such as Excel, who uses the tools and what they use for varies so much that it unlikely any firm will try to allocate the cost of that software to a specific client or matter. Other technologies are obtained for use only for one matter, with no intention to use them again. In that situation, a firm might elect to pass through the cost of the software to the client for which it is being used. I have seen that done with specialized CAD programs, for example. More common are situations where a law firm pays a fee such as an annual subscription for the use of an eDiscovery platform, and then wants to recover that cost on a monthly matter-by-matter basis.  

Who Should Bear eDiscovery Costs? 

For as long as there has been eDiscovery, there has been a debate about who should bear the costs of eDiscovery. Should those costs be borne by law firms or by their clients? 

There are three general models law firms use to address eDiscovery costs: they absorb the costs, recover them, or mark them up. As a practical matter, firms typically use a combination of the three approaches. 

Absorb 

Firms taking the “absorb” approach treat eDiscovery expenses as a cost of doing business. They effectively treat these expenses as overhead just as they might treat the costs of office space, administrative staff, and software they use for billing, email, or word processing. 

Recover 

With the “recover” approach, firms try to avoid spending money for eDiscovery that they are not able to recover. 

There are several ways law firms try to accomplish this. One approach is to avoid the situation entirely by having the organization providing eDiscovery software or services send its bills directly to the end client. The firm never receives a bill, never makes a payment, and has nothing it needs to recover. 

A common “recover” method used by firms is to have the eDiscovery software or service provider send matter-specific bills to the firm. The firm pays the provider and bills its client for the same amount. 

A third “recover” mechanism is used where firms receive a single bill that covers multiple matters. In that situation, a firm receives a bill, pays the provider, divvies up the bill, and bills its clients for the amounts they own. With this approach, firms usually assign different amounts to different matters based on some form of pro rata calculation. 

Firms using the second or third “recover” approaches sometimes mark up the bills they send or add a fee to cover administrative costs. 

Profit 

Some firms treat eDiscovery as a profit-generating activity. Some of those firms treat eDiscovery as one more billable activity. Others create wholly owned eDiscovery subsidiaries and engage those subsidiaries much as they would any other eDiscovery service provider. 

In Part 2 

In this post, I covered what eDiscovery costs law firms incur and outlined three approaches law firms use to handle those costs. 

In the next post on this topic, I will examine the pros and cons of each approach, discuss how to decide which model to adopt, and offer pointers for success.